Industry Steering Committee lauds T+2 as compliance date arrives

Securities firms will begin complying with the SEC’s regulation shortening the settlement cycle from T+3 days to T+2 days as of today. Previously, firms observed a five-day settlement cycle before the Commission set T+3 as the standard in the 1990s. The Commission adopted the T+2 standard in its Securities Transaction Settlement Cycle release in March while setting the effective date at May 30, and targeting September 5 as the rule’s compliance date.

The SEC’s rule change; bank rules lag. Specifically, the Commission revised Exchange Act Rule 15c6–1 to provide that, other than for exempted securities, a broker-dealer may not enter into a contract for the purchase or sale of a security that provides for payment of funds and delivery of securities beyond the second business day after the contract. The rule includes some exceptions and would allow the parties to a transaction to agree to a different date.

In its adopting release, the Commission noted that U.S. banking regulations had not kept pace with the new T+2 settlement cycle, although the Commission suggested this would not present issues for implementation. But to ensure a smooth transition, the OCC and the FDIC recently proposed changes to align banking regulations with the T+2 settlement cycle. Neither the OCC nor the FDIC said they viewed the existing banking regulations as a hindrance to implementation of T+2. The OCC and FDIC had previously issued guidance about the industry-wide move to T+2.

Benefits of T+2. The Industry Steering Committee, formed by The Depository Trust & Clearing Corporation to solicit industry views on the transaction settlement cycle, noted today’s milestone in a press release touting how T+2 can reduce market and counterparty risk and increase financial stability for markets and investors. T+2 also aligns the U.S. with other global markets.

The Securities Industry and Financial Markets Association also noted its backing for the shorter settlement cycle based on many of the same reasons cited by DTCC. SIFMA published a brief FAQ in advance of the T+2 compliance date.

Firms were given significant time to adjust their trading systems to handle the shorter settlement cycle although the securities industry had long prepared for a Q3 2017 launch. The ISC issued a "playbook" suggesting a time frame for industry compliance, which appeared to influence the Commission’s selection of a compliance date in its final rule.